Will insurers spurn the flood victims?

Growing evidence of climate change may prompt the insurance companies to hike premiums in low-lying areas

People wading through flood water to reach their own front doors will not have the time or energy to worry about the impact on next year's insurance bills. But the ever rising number of claims may have quite an effect on premiums in high risk areas, particularly when many more claims are likely to come in. Last week, the Environment Agency issued 40 severe flood warnings, where conditions are likely to be so serious that people need to leave their homes. It provided another 200 straight flood warnings, which alert people to be prepared for trouble. That is the highest number it has produced in its history.

People wading through flood water to reach their own front doors will not have the time or energy to worry about the impact on next year's insurance bills. But the ever rising number of claims may have quite an effect on premiums in high risk areas, particularly when many more claims are likely to come in. Last week, the Environment Agency issued 40 severe flood warnings, where conditions are likely to be so serious that people need to leave their homes. It provided another 200 straight flood warnings, which alert people to be prepared for trouble. That is the highest number it has produced in its history.

The bill for weather damage has not come close to the £1.4bn it took to repair the ravages of the great storm in 1987, effectively a hurricane. But the problems have gone on for longer, and no end is in sight.

The real nightmare for people with flood damage is the prospect that their insurers might refuse to take them on again. Norwich Union is the largest group in the field for it now incorporates Commercial Union and General Accident. The group stresses that it will continue to offer cover for existing customers, and so too have Royal Sun Alliance and Axa. But none will be keen to take on new business in places like York or Uckfield How will that affect people who have moved house recently? If they have taken buildings cover through their mortgage lender all should be well.

"People do not have to take our policies, for they are always free to go off to the direct insurers, like Direct Line," says John Grimbaldeston of the Abbey National. "The snag is that direct insurers are far more likely to cherry pick the properties they want to cover and disregard the rest . We believe that some companies will not provide buildings cover in at least 10 per cent of Britain's postal districts. They will exclude them, or red- line them in insurance jargon".

But global warming and higher claims have certainly changed many lenders' attitudes towards buildings insurance. Fifteen or twenty years ago most of them had "block policies" where the charges for household insurance were the same, whether you lived near water meadows or some house on safe, granite soil miles from a river.

"Nowadays they vary their charges in line with the two risks which really matter," says David Hudson insurance analyst for HSBC Stockbrokers

"Floods and subsidence produce the big bills. A group like Abbey National, Britain's second biggest mortgage lender now has 26 different rating areas. People may be free to insure the structure of their homes as well as their contents - on their own. But most people still take the contract their lenders provide."

"People always stress what happens to buildings, but far more claims come in for damage to contents in the wake of floods, so weather may even have some impact on premiums."

People may not like a rise in the cost of buildings cover though City analysts like David Hudson believe that increases are likely. The real fear among people in areas that have been flooded are that they may be "re-rated," the industry's euphemism for raising local charges sharply. But Norwich Union is quick to stress that most people whose property has been flooded this year should not have a problem.

"So far this winter we've faced far more claims for storm damage than flood damage," says Liz Nicholson of Norwich Union. "All the same flood claims are usually made by people who have had to claim for flood damage two or three times in the last three years and they may well face higher insurance costs."

"We normally make rate charges on an individual basis, so any extra premiums will depend on how many claims we have had from a particular address".

Any move to bring in re-rating would cause an outcry, but the alternative would be far more worrying for people who make a claim.

If you make a flood claim on their building cover you now have to pay the first £25 of any bill - as you do with any other claim. The risk is that some insurers may bring in a much higher excess so you would have to pay a much larger share of any flooding bills - perhaps the first £200 or £250.

Anyone who has faced subsidence, where the ground under your house starts moving, must pay the first £1,000 of any bill. Indeed, one or two insurers like Independent will vary this excess in line with the risk your particular property represents. That can mean you have to meet up to £3,000 of any bills, though the group is quick to stress that most of its customers do not more than the basic £1,000 which applies elsewhere.

The government's reaction to the floods is to demand action. John Prescott wants a new body designed, among other things, to speed up the way insurers deal with claims.

That may be good sound-bite politics, but property damaged in the floods must dry out properly before work starts. That will not take less than four weeks, and can stretch to three months in serious cases. If work starts too early, wallpaper can come down and the house itself will suffer from rising damp. At least insurers will pay for alternative accommodation while houses are uninhabitable.

Higher premiums and paying a higher share of the bill are nasty possibilities. Of course they may never happen. But the City believes that they may well come in, sooner or later.

Met Office WebSite: www.met-office.gov.uk; Environment Agency Floodline 0845 9881188; Environment Agency website www.environment.agency.gov.uk.